PSE Circular for Brokers No. 1330-99

June 7, 1999 PSE CIRCULAR FOR BROKERS NO. 1330-99 June 4, 1999 BY TELEFAX AND BY HAND PHILIPPINE STOCK EXCHANGE Exchange Road, Ortigas Center Pasig City, Metro Manila Attention: Ms . Luisa W . Buenaventura/Ms . Racquel R . Angeles Disclosure Department RE : Philippines Star Article of 04 June 1999 Gentlemen : In reply to your fax of 4 June 1999 on the article appearing in the 4 June 1999 issue of the Philippine Star under the caption "Negros Navigation rapped for issuing non-existent share," we wish to clarify as follows: 1. Negros Navigation Company. Inc. (NENACO) is not the source of the said news article; and 2. As of this date, we are not aware of the SEC ruling being quoted in the said article and we have not received any communication as to the existence of the said ruling. aisadc We trust that the foregoing clarification is in order. Should you have any questions on the foregoing, please do not hesitate to call on us. Very truly yours, (SGD.) ROBIN M. ARROWSMITH Corporate Information Officer Negros Navigation rapped for issuing non-existent shares Publicly listed shipping firm Negros Navigation Co. (Nenaco) was found in violation of the Revised Securities Act (RSA) for issuing P1.15-billion worth of non-existent preferred shares to its parent company, Metro Pacific Corp. (Metropac). In a ruling, the Securities and Exchange Commission (SEC), issued a show-cause order against Nenaco for offering shares of stock that have neither been created nor approved by its own board of directors. LLpr Metro Pacific had bought into Nenaco earlier and the P1.15 billion was infused as additional equity. Nenaco claimed that the issuance was an exempt transaction and since the stocks did not exist yet when Metro Pacific made the infusion, the amount it received was recorded as "deposit for future subscription." Nenaco also argued that there was no damage to the investors or customers of Metro Pacific and that they in fact benefited from the infusion. According to the SEC, however, a corporation cannot issue preferred shares in the absence of an express authority in the articles of incorporation. "While Nenaco may not have violated this provision, it has violated another provision which prohibits offering of securities without prior registration under the RSA," the SEC said. cdll According to the SEC, Nenaco's argument was also untenable. "If offering of created shares without prior registration is prohibited, the more reason that non-existent shares should not be allowed," the commission said. The SEC said that in the present case, the act of accepting future subscription deposits was a clear indication of an offer to sell and the fact that the deposit has already been booked in the stockholders equity portion was indicative that the amount was accepted as payment of an offer sell of securities. "Had the intention been merely to treat the payments as advances in anticipation of a future creation of preferred shares, the amount received should have been booked in the liability portion of the financial statements," the SEC said. Thus, the SEC ruled that the offering of preferred shares which were not only unregistered but also non-existent constituted a violation of the RSA. "The company's claim that nobody was prejudice by the transaction should not be taken as a ground for exemption," the SEC said. "Allowing such justification would be a dangerous precedent which may be invoked by other violators." Nenaco's violation has been elevated to the commission en banc for a ruling and decision on the appropriate penalties.